Can the UK housing crisis be alleviated with ‘hard money’ loans?

The housing crisis in England and Wales is one where very few houses are being built because potential buyers are unable to get loans. “Hard money” loans as a considered solution.

“Hard money” loans, most commonly issued in the US but exist in the UK between individuals, for the most part, allow loans to individuals and businesses who may not be able to obtain traditional loans from a bank. They are secured, where an acceptable amount of equity in an asset will assure the lender that their loan is protected (a 60-70 percent loan-to-value ratio, typically) in the event of default.

With loans at the crux of the UK property crisis, can these hard money loans help alleviate the problem should they become more prominent? Will homebuilders or homebuyers be able to obtain financing with these subprime loans where they could not through traditional channels?

Most analysts don’t think so. First, as private deals, hard money lending is unlikely to happen on a large scale without a larger, more established lending institution. And the value of the land, being what it is, as a basis for collateral is also unlikely: who can own the land and yet cannot afford to build (other than, perhaps, the land’s heirs)? Also, so-called hard money loans are usually made with short terms, three years or less, good enough for a builder, perhaps, but barely enough for an owner-occupier.

There are reasons to think that the British might start building and buying more houses. A survey of market watchers conducted by the Reuters financial news agency in February 2013 found some hopeful signs:

• House prices in Britain have not plummeted as deeply as in the United States. People who owned homes before, say, 2007 are in a good position to negotiate if their income allows it.

• With the threat of a triple recession looming, more people are working in the UK than ever before.

• Bank of England interest rates have been holding steady at 0.5 per cent for those who qualify (which usually requires a good down payment on the property you wish to purchase).

• At the end of 2012, mortgage approvals increased to 55,785 and are expected to increase steadily in 2013.

• The government’s Finance Loan Scheme (FLS) may find more use among lenders as time goes on, according to Nicholas Wrigley, Chairman of Persimmon PLC, a leading developer of residential housing (there are who do not agree with this, but time will tell) .

The Guardian also reported in February 2013 that home sales are on the rise, according to the Royal Institution of Chartered Surveyors (RICS). But the organization warns that the recovery is fragile and remains unappealing to first-time buyers.

Another means by which homebuilding can begin to meet the UK’s growing population is for builders to choose to build rental homes where they are most needed. With so many young families looking for space, rent is rising while home ownership is on the decline. “Triple dip induced paranoia appears to be haunting the market, with many prospective buyers in the family sector choosing to rent for the time being,” said the director of a Wakefield-based estate agency.

Another agent in Maidenhead, Berkshire, observed: “Buy-to-let investors are coming back to the market in a remarkable way.” The Guardian reports that in the fourth quarter of 2012 purchase-to-let mortgage loans grew by 16 percent over 2011, making up 13 percent of all mortgages granted last year. Mutual member-owned building societies (BSAs) that historically encourage individual homeownership are increasingly making loans to homeowners; this is due to both demand factors and because higher rates from buy-to-let customers generate better revenue for those companies.

It appears that investors in strategic land and housing development are exploring various means to increase the housing stock and achieve asset growth in the process. Before embarking on such an investment, individuals should work with a personal financial advisor who can weigh the risks against alternative investments in a holistic manner.